Markets Sluggish, But the Recovery Marches On

We get back to trading this week after another tough slog for tech stocks. The Nasdaq finished its worst week since March and the S&P 500 and Dow also closed the week lower.

The presidential campaign has entered the post-Labor Day home stretch, and markets will be sensitive to the ups and downs of the campaign — at least in the short term. The tech sector may be particularly sensitive to political machinations.

The Trump administration is pursuing antitrust action against Google and Facebook, fueling uncertainty. But selling in tech may also be driven by investors who are anticipating higher long-term capital gains and corporate taxes —proposals articulated by former VP and Democratic candidate Joe Biden. Apart from the election, the expiration of federal aid and the stalemate in Congress is another uncertainty. The challenges schools and colleges are facing with coronavirus cases on campus and in classrooms is another factor complicating the view ahead. There’s a lot of noise right now.

But turn down the volume. The economy continues to climb out of the economic valley. The TSA screened 968,673 travelers on Sept. 4, the most since March 17. While the industry is still down 50 percent from a year ago, it’s up tenfold from April’s low point. Retail sales have fully recovered pandemic-driven declines. Manufacturing is expanding again. Small businesses are hiring. The unemployment rate has dipped below double digits.

As the election heats up, and emotions and rhetoric hit a fever pitch, we remind investors to remain focused on the underlying economic story. Don’t get lost in short-term portfolio politicking, and instead adhere to your plan and remain focused on the long-term. Remember, your financial goals aren’t contingent on who sits in the White House.

WALL STREET WRAP

Small Business Optimism Rebounds: Small business owners’ outlook on the economy improved in August, as the NFIB Optimism Index rose 1.4 points to 100.2. That reading puts the index slightly above its 46-year historic average (prior to the pandemic the index sat at 104.5).

Diving deeper, job openings increased while earnings trends also improved. Twenty-one percent of small business owners surveyed said they planned to increase hiring — that’s a significant improvement from April when only 1 percent planned to hire. According to the report, manufacturing employment remained strong, but the service sector remains the “missing link” to stronger job growth going forward. Overall, data indicate the small business sector, which accounts for roughly 50 percent of private sector jobs, is moving in a positive direction.

Still, the outlook remains cloudy. Expectations regarding improvement of the economy and of higher sales both fell.

Aid Talks Stall Again: Congress has again failed to agree on another round of federal coronavirus aid. On Thursday, Democrats blocked Republican’s scaled-down aid proposal. The package included $300 in additional weekly federal unemployment until Dec. 27. It also included liability protections for businesses and funds for schools, testing, vaccines and childcare. One thing missing: Another $1,200 check for all Americans.

At this point, legislators aren’t confident another round of aid will be approved before the election in November.

Inflation Firming, Still Modest: On the heels of the Federal Reserve’s new philosophy on inflation, we’ll be checking in with prices periodically going forward. Recall, the Federal Reserve said it would focus on an average inflation target of 2 percent, allowing it to run over that 2 percent level for some time before even considering a rate hike.

In August, the cost of goods and services rose 0.4 percent, marking the third consecutive month of price increases. A sharp rise in the cost of used cars and trucks accounted for more than 40 percent of the index’s rise. Overall, inflation remains historically low with prices rising 1.3 percent year over year.

While we’ve been conditioned to view inflation as the enemy, the Fed is trying to make it our ally. Modestly rising prices should help boost employment and aid the recovery, while falling prices may compel companies to keep workers on the sidelines.

THE WEEK AHEAD

The State of Retail: It took just six months for retail sales to descend from record highs to lows and back to record highs. The march through the economic valley lasted from January to July. That’s significantly faster than the over three-year timespan between record highs during the Great Recession. This week, we’ll see what the pace of growth was in August. Declining unemployment, and unofficial signals from specific industries (i.e. airlines), should help propel sales higher. This is an important metric to follow, as spending accounts for a bulk of GDP growth in the U.S. and is critical for sustaining the recovery. These reports will take on added weight, especially as we begin the holiday shopping season in the months ahead.

A Source of Strength: It hasn’t been hard for analysts to dig into housing data, as it’s been a source strength and stability through much of the pandemic. Although not immune from declines in spring, building activity and sales have experienced a robust recovery, fueled by low interest rates and hot demand for homes outside of urban centers and in less populous suburban and rural areas. We’ll get a read on builder optimism, permits, and housing starts this week.

A Check on Industrial Production: On Tuesday, we’re going to be paying attention to the industrial production index — a positive surprise may be in store. The consensus estimate from Bloomberg calls for a 1.2 percent increase in August. But a strong manufacturing ISM read earlier this month may portend a read that beats estimates.

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